09 May, 2017

CHARITABLE REMAINDER TRUSTS OFFER A SOUND ESTATE PLANNING OPTION

WITH
HOMEOWNERS TRAPPED BY HIGH TAXES, CRTS MAKE A COMEBACK IN PALO ALTO.

For longtime Palo Alto
homeowners, soaring home prices have been an unexpected windfall, a bonus on
top of good schools, plentiful jobs and a close-knit community. But for some,
high real estate prices are a mixed blessing: they may want to downsize to a
smaller place or sell to provide for their retirement or pay for relatives’
education. Now they face a huge tax bill, in the form of capital gains.

So it’s no surprise then that
more Palo Altans are turning to charitable remainder trusts (CRT) to make
selling their home less financially painful.

“For eight years, I didn’t see
any of these at all. It’s picked back up again,” says David Spence, a partner
at the Menlo Park law firm Royse Law. Spence says high real estate values, the
booming Silicon Valley economy and higher tax rates have been behind the flurry
of inquiries he’s received in recent years.

Area charities are also
aggressively courting charitable giving while recognizing that the potential
donor’s largest asset may come with a huge tax liability. Both Stanford and the
Silicon Valley Community Foundation, for example, boast on their websites of
their ability to act as trustees for a CRT.

DODGING TAXES, WITH THE
IRS’S BLESSING

CRTs were not uncommon in the
red-hot economy of the 1990s but tailed off through much of the first decade of
this century, perhaps due to favorable changes to the tax code in 1997 but Palo
Alto’s booming prices mean many potential sellers will today easily top the
$500,000 per couple exclusion.

The trusts work like this: A
person who wishes to sell their appreciated home instead transfers it into an
irrevocable trust, which sells the asset without having to pay the capital
gains tax. The trust then pays the donor (“grantor” in legalese) a portion of
the trust’s assets annually. The payment stream can be a fixed dollar amount or
percentage of the trust’s assets and for a fixed number of years or for life.
What’s left over at the end of the trust’s life, the “remainder,” goes to the
charity. The donor must pay taxes on the income stream but gets to deduct the
remainder gift immediately.

Margo Felt of the Los Altos law
firm Thoits Law says some clients cite tax planning, not charity, for creating
a charitable trust. “Some people can end up better off having income come out
of the charitable trust.”

Spence recently worked with a
retiree who had few assets aside from her home and used a CRT to pay for her
retirement while giving back to the community.

CAVEATS: BE FREE OF DEBT,
BE READY TO MOVE

As
with anything tax-related, these trusts come in multiple flavors and the tax
benefits can vary dramatically based on circumstances so working with a
qualified attorney or estate planner is a must. The property should generally
be free of debt, although Spence says that there are instances where he has
worked out an agreement to split a property into separate pieces with one
placed in the trust and the other, to which the debt is attached, left
outside.

“That is a solution that can
sometimes be done depending on the bank, but it’s not easy,” Spence says. “The
general rule is that you’ve got to get rid of the debt before you create the
trust.”

Spence also says that homeowners
should not have made a commitment to sell their property and should be out of
their house prior to its being placed in trust. “If the owner is living in the
house [after it is in the trust], that is private inurement,” Spence says. That
is, “they benefit by living in the house,” he says.

Beyond that, for anyone sitting
on a home that is worth 25 times what they paid for it, not uncommon in Silicon
Valley, and who wants income for their later years a CRT may allow them to
sell.

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I have been a real estate
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Woodside and Los Altos. Having lived in the community for over twenty years, I
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